The board of directors for the Martin Luther King Housing Development Association has fired the agency’s executive director and its top financial officer amid serious financial problems that could jeopardize the nonprofit’s future, board president Jeffrey Bruce said.

The board is now investigating the agency’s finances and seeking outside legal advice while some of its remaining staffers conduct an internal audit, Bruce said.

Part of the internal review centers on whether former executive director Felix Flannigan and his chief financial officer, Val Tiller, spent agency funds improperly, Bruce said. The agency has asked the city for about $6,000 so it can hire an outside accountant to review its books, Bruce added.

“My main objective is to keep this agency afloat, regardless of what may be perceived as some wrongdoing – and some of the board (members) do think there has been some wrongdoing,” Bruce said

“The money was there,” Bruce added. “We’re just not sure where it went.”

Among other things, Bruce said, Flannigan allegedly made unauthorized business deals without the board’s approval, including using an apartment building for low-income residents as collateral for a loan the association later defaulted on.

In formal letters issued to Flannigan and Tiller on July 31, Bruce cited “today’s economic environment” for the board’s decision to “reduce and refocus” its direction. The letters say that technically, Flannigan and Tiller had been “laid off,” and could seek unemployment benefits, Bruce said.

The letters were worded on the advice of the board’s attorneys, Bruce said. But he added both men were terminated because of a “lack of financial controls and oversight” on their part.

“I believed that’s what we were doing, firing them,” Bruce said.

Flannigan did not return repeated telephone calls seeking comment.

But Tiller, who worked for the agency for 12 years, denies he or Flannigan did anything wrong. He also disputes he was “fired” or put on suspension, saying he demanded to be laid off after the agency stopped paying him and asked him to work as a volunteer.

“The board is worried about liability and looking for a scapegoat,” Tiller said Friday. “The board is responsible for financial oversight, and they haven’t lived up to that. Now, they’re trying to back-pedal.”

Tiller claims that, for months, the agency’s board has refused to take legal advice from bankruptcy attorneys and ignored his regular reports about the agency’s dire financial health. He added the agency has not audited its books since 2007, despite his repeated insistence it do so.

“There’s nothing weird or illegal going on there,” Tiller said. “They owe over $1 million in bills, and they’re only bringing in about $60,000 per month. It doesn’t take a math wizard to figure this out. They’re insolvent, and they’ve been insolvent for a long time.”

SELLING OFF ASSETS

As it stands now, the housing development association faces about $800,000 to $1 million in debt and is unable to pay contractors, creditors and other entities, Bruce said.

Because its books are out of compliance, the agency cannot write grants. Many of its properties also are “leveraged to the hilt,” and so can’t be sold, either, Bruce said.

But the agency likely will seek to sell two of its most valuable properties – its Tacoma Avenue headquarters and a vacant lot at Martin Luther King Way and 11th Street. That’s the site of a proposed business center the agency secured $2 million from the state to buy and prepare for development.

Together, those properties have an assessed value of about $8 million, Bruce said.

“We have enough equity in those properties to pay off some of our debt,” he said.

If such sales can’t be brokered, Bruce said, the agency likely would need to find some sort of public or private bailout to continue operating.

“If we’re not able to do that – I don’t want to go there. I really don’t,” Bruce said. “The situation we’re in really jeopardizes our future operations.”

“If (President Barack) Obama’s got some stimulus money,” Bruce added, “we could use some.”

One plan now in discussions is selling the vacant lot at MLK Way and 11th to the City of Tacoma. The association seeks to get at least $2.4 million for that property, Bruce said. The city is in the early stages of researching the possible purchase, City Manager Eric Anderson said Friday.

“There’s lots of due diligence to do yet,” Anderson said. “No agreement has been made to go forward. We’re just looking at it and trying to figure out if this is a good piece of property for the city to get involved in.”

But support for such a purchase appears mixed.

“To think of this very important piece of property going to a developer that doesn’t have the interest of the neighborhood is worrisome,” said Councilwoman Lauren Walker, who represents the Hilltop area. Walker said she is “supportive of purchasing the property,” but noted more research needs to be done.

“I’m pretty skeptical about the whole thing,” countered Councilman Mike Lonergan. “If we’re going to invest in things, let’s invest in (properties) we already have and bring them up to standard.”

Some city officials, local nonprofit analysts and housing officials added they’re not surprised by the departure of Flannigan, who’s led the agency since 2000.

“I don’t know why that board took so long,” said Liz Heath, a nonprofit agency consultant who audited the agency seven years ago and found widespread financial problems under Flannigan’s management.

“One of the recommendations was that Felix resign from his position,” Heath said. “We didn’t say he should be fired, but we had hopes that he would take the gracious way out.”

Yet Flannigan remained, despite continued signs of financial problems. The agency even formed a political action committee to lobby for funding and support politicians it favored in years after the report.

In April, Flannigan and former Tacoma Mayor Brian Ebersole, hired to do community relations for the agency, unsuccessfully requested nearly $1.9 million in assistance from the City Council, most of it to help pay off a failing property loan, even though the agency was delinquent on at least $27,000 in loan payments to the city at the time.

“This is like someone going to the bank and saying, ‘I realize I’m not current on my payments to you, but my proposal is to ask for more money,’” Lonergan said. “No bank would go that route, of course.”

Still, public housing officials say they’re fearful if the nonprofit goes under, affordable housing availability in Tacoma will take a dramatic hit.

“We’re very concerned that an agency that provides such an important part of the city’s affordable housing portfolio may be in trouble or failing,” said Michael Mirra, executive director of the Tacoma Housing Authority.

SHELL OF ITSELF

At its height about six years ago, Martin Luther King Housing Development Association – which describes itself as the “largest private residential landlord providing affordable housing in Upper Tacoma” – provided about 330 affordable housing units and employed about 42 people, Bruce said.

The agency is now a shell of itself: It owns and manages about 85 units, Bruce said, and manages another 39 units in apartment buildings it doesn’t own. The organization employs five to seven staffers, he said.

The agency’s dramatic decline largely has been caused by what Bruce described as “risky investments” made by Flannigan that failed when the economy soured.

“It’s a good agency, but it’s an agency that’s been hit hard by the economy,” said Tacoma lawyer Jack Connelly, who also serves on the agency’s board of directors.

“We’re disturbed of course by a lot of the stuff that’s been going on and we’re heading in a new direction.”

The nonprofit’s five-member volunteer board formally fired Flannigan and Tiller on July 31, Bruce said. Linda Fotiou, who had served as the agency’s development and operations director, has since been appointed to oversee daily operations.

“I prefer to call it a lack of financial oversight,” said Bruce, a board member since 1999 and president the past two years. “But we still have a lot to sort out: Where did the money go? Why didn’t the bills get paid? Was it mistakes or was there something more going on here?”

Amid mounting debt and growing financial concerns, Bruce said, the board placed Flannigan and Tiller on administrative leave on July 1, assigning staff to begin investigating financial issues.

At that time, the board, which Bruce said has been holding meetings twice a week since April as the financial turmoil intensified, drafted a 15-point memo of “checks and balances” to unresolved financial issues, ranging from the handling of routine monthly bills to getting a complex equity investment fund established that had been languishing for years.

“We wanted to see if they could clean up the disorder that was in-house,” Bruce said. “We said, ‘Look guys, we have to have some checks and balances in place by end of the month. ... We finally came to the conclusion it wasn’t working.”

Court records show Wm. Dickson Co. performed about $50,000 in asbestos abatement work last year at the agency’s MLK Way site, but received no payment for its work.

When company officials sought to get the money from Flannigan, he “expressed regret for his failure to pay, and that he was ‘looking to take care of that soon,’” Jason Roosa, the project manager, states in court records. But the company never heard from Flannigan again, and after more than a year of not getting paid, the firm sued the agency earlier this year.

Bruce said the agency owes multiple creditors for services already rendered.

Earlier this year, Bruce said he personally received a phone call from the housing agency’s insurance company, which told him the association was two months past due on its premium, couldn’t reach Flannigan and was ready to cancel the agency’s insurance policy.

More troubling, Bruce said, was when board members learned earlier this year the agency was losing its “money-maker,” the 39-unit Charlesbee apartments, on South G St. Those rental units garnered upward of $40,000 in monthly revenues that were largely used to pay for the association’s operating costs, Bruce said.

Without board authorization, Bruce contends, Flannigan put the building up as collateral to secure a loan to buy a vacant property on South 48th Street near the Tacoma Mall with ideas for developing 110 units of low-income housing. When the agency defaulted on the loan, it lost both the vacant lot and the apartment building, which houses low-income families.

“We did not find out about it until it was in foreclosure,” Bruce said.

Tiller disputes Bruce’s claims, saying the board repeatedly was warned about financial problems, but ignored them.

“They gave Felix carte blanche to make any decisions he wanted,” Tiller added.

“When they talk about putting the Charlesbee up (for collateral), they gave (Flannigan) the permission to do that. Now that it has all back-fired and it’s all unraveling, they don’t want to take responsibility for it.”

Tiller said for nearly a year, the agency has talked about bankruptcy. In November, he, Flannigan, and Ebersole scheduled to meet with a bankruptcy attorney. But when neither Flannigan nor Ebersole showed up for the meeting, “I knew then that I wanted out,” Tiller said.

“We weren’t solvent,” he added. “We needed to make a decision and no one wanted to make a decision.”

Ebersole, who Bruce said was laid off a few months ago, did not return a telephone call seeking comment.

As recently as April, Tiller noted, the agency missed its payroll and didn’t pay staff members.

“Felix is a good idealist and they liked the story Felix was telling,” Tiller said of the board. They didn’t like the story I was telling – that we’re not in good financial position – and so they just ignored everything.”

“They were not being realistic, and now its too late,” Tiller added. “They’re certainly in very deep now.”

Members of directors’ boards for such nonprofit agencies are legally responsible for providing financial oversight, and must take care to do so under the law, Heath said.

“If they do not they can be held personally liable,” she said.

Any of the city’s investments would have been secured by agency property, Anderson, the city manager, said. In fact, the city already has a lien for delinquent payments owed to it by the association against the Charlesbee apartments, which Anderson said “remains intact” even though the agency no longer owns that building.

“The council has expressed concerns about the (agency’s) affordable housing, and of course we have investments in them, so we’ll act to protect our investments,” Anderson said. “But at this point, we don’t know exactly how we might proceed to do that yet.”

Councilwoman Walker said any of the city’s future efforts to help the agency will be based on its mission of public service – not on its inner financial turmoil.

“Our goal is looking at the mission of affordable housing, and what we can do to preserve that,” she said.

Bruce added that he understands the association’s standing in the community is likely tarnished.

“We’ve got to rebuild our reputation,” Bruce said. “We’ve always been seen as a good thing in the community, and I don’t know if we are anymore.”

Lewis Kamb: 253-597-8542

lewis.kamb@thenewstribune.com